Full text of Business Conditions (Federal Reserve Bank of Chicago) : September 1947

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SEPTEMBER, 1947
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A REVIEW BY THE FEDERAL RESERVE BANK OF CHICAGO

Livestock and Meat Situation
Strong Demand Supports High Prices
Although many consumers object to the prevailing high
level of meat prices, they as a group have continued to con­
sume meat in record quantities. Per capita civilian con­
sumption of meat may average 153 pounds during 1947,
slightly above the year ago level, 15 per cent above the
1937-41 average of 134 pounds, and the highest for any year
since 1909. This high level of consumption is made possible
by the large production of meat, expected to total 23 billion
pounds for 1947, about equal to 1946, and the fourth largest
on record. Declines in exports and military requirements
will permit per capita civilian consumption to exceed the
1946 level, although total production is about the same.
LARGE PRODUCTION OF BEEF

More of the meat supply this year will be beef and veal
with less pork, lamb, and mutton included. Beef and veal
production were at a high level during the first half of the
year and are expected to account for 52 per cent of total
meat production in 1947, compared with an average of 47
per cent in 1937-41. Pork production in 1947 probably will
be below the preceding year due to the reduced 1946 fall
pig crop, marketed largely during the spring and summer
of 1947. Lamb and mutton production may be 20 per cent
below 1946 and the smallest of recent years. Fortunately in
this respect, however, lamb and mutton normally account
lor only 5 per cent of the total meat supply, with veal con­
tributing 6 per cent, beef 41 per cent, and pork 48 per cent.
Although total meat production in the first quarter of
1947 was moderately less than in the first quarter of 1946,
output during the second quarter was well above a year ago.
This high level of meat production may not be maintained
through the third quarter of the year, however, due to a
greater than usual seasonal decline in pork production. Also,
favorable pasture conditions appear to have delayed the
usual seasonal rise in marketings of grass-fat cattle. These
conditions strengthened livestock prices in July and August
and may well provide strong support through September.
From October to the end of the year, meat production
will increase seasonally, possibly more than usual, and meat
and livestock prices may decline somewhat from the peaks
reached in late summer or early fall. Although supplies of
well finished cattle are expected to continue small, total
marketings of cattle probably will continue at a high level
during the remainder of 1947, and possibly in 1948, as
farmers reduce further the number of cattle on farms. The
outlook for hog marketings during the fourth quarter of
1947 is uncertain. High priced corn may encourage farmers
to market hogs at light weights and, therefore, earlier than
usual. Flowever, if the corn crop should fail to mature be­
fore killing frosts this fall, large amounts of soft corn would
need to be fed to livestock. This might delay the seasonal



peak in hog marketings and pork production until late in
January or February.
SMALL INCREASE IN 1947 PIG CROP

The 1947 spring pig crop was reported to number about
53,151,000 head, one and one-half per cent more than in
1946, and two per cent larger than the 1936-45 average. The
number of sows farrowing in the 1947 season was estimated
at seven per cent more than in 1946. However, the number
of pigs saved per litter averaged 6.1, materially below the
average of 6.5 last year, and resulted in only a slight increase
over 1946 in the total number of pigs saved.
Farmers’ reports on breeding intentions about June 1 in­
dicated a nine per cent increase over 1946 in the number of
sows kept for fall farrowing. However, this was'two per cent
below the 1936-45 average, the number of sows having far­
rowed last fall being the smallest of recent years. If these
breeding intentions materialize, and the number of pigs
saved per litter is equal to the 10 year average, the 1947 fall
pig crop would be about 32.5 million head, making a total
combined spring and fall pig crop of about 85.7 million
head, three per cent larger than in 1946 and one per cent
above the 1936-45 average.
The size of the 1947 spring pig crop and the prospective
fall crop indicates that two to three million more hogs will
be slaughtered during the hog marketing year beginning in
October 1947 than in the current year. However, if the hogcorn price ratio continues below average, and the corn crop
turns out considerably smaller than in 1946, there will be a
tendency to market hogs at lighter weights than in the past
few years. This would result in little if any increase in pork
production from the 1947 pig crops.
CATTLE NUMBERS DECLINING

The number of cattle on farms and ranches is declining.
From an estimated peak number of 85.6 million on January
1, 1945, the number declined to 82.4 million a year later and
to 81.1 million at the beginning of 1947. The rate of
slaughter during the current year indicates that cattle num­
bers will be reduced further by January 1, 1948.
Shipments of stocker and feeder cattle and calves into
eight Corn Belt states during January through June were 19
per cent greater than a year earlier and the largest since 1941.
Shipments during May and June were, however, below the
abnormally large shipments in those months in 1946.
The number of cattle fed each year is determined largely
by the supply of corn and other feeds in relation to the
number of livestock on farms. The number of both grainand hay-consuming animal units on farms at the beginning
(Continued on Inside Back Cox’er)

Banks Continue to Expand Consumer Financing
Easier Instalment Credit Terms in Prospect

*

Outstanding consumer credit has now reached a new all­
time level of 11 billion dollars, double the V-J Day total,
and gives promise of rising at least another billion dollars
by the end of the year. The bulk of this increase is expected
in instalment sales credit, now comprising 17 per cent of all
consumer credit outstanding. Instalment sales credit is the
only major consumer credit division which thus far has
failed to exceed its 1941 prewar peak1. For commercial
banks, currently extending at least two-fifths of the total,
the general postwar upsurge has meant sharply increased
consumer credit lending.
Virtually all Seventh Federal Reserve District member
banks2 are currently making consumer loans, but there is
marked variation among individual banks in the type of
loan being emphasized. Ninety per cent of the banks have
single payment cash loans on their books, and roughly 80
per cent are taking part in personal instalment cash lending
and automobile instalment financing. Only two-thirds, how­
ever, are engaged in other retail instalment financing and
less than half in making home repair and modernization
instalment loans (see accompanying table).
Already the dominant instalment cash lender before the
war, commercial banks have further strengthened their posi­
tion in the last two years. Bank loans in this category have
increased 187 per cent since the end of the war, compared
with gains ranging from 63 per cent for small loan com­
panies to 97 per cent in the case of industrial banks. Com­
mercial banks in the District and nation have also con­
siderably expanded single payment cash loans, about 50 per
1The other major divisions and their respective percentages of total con­
sumer credit outstanding are: instalment loans, 27; charge accounts, 27;
single payment loans, 21 ; and service credit, 8.
2Except as otherwise indicated, industrial banks are excluded from this
discussion.

PERCENTAGE OF SEVENTH FEDERAL RESERVE
DISTRICT MEMBER BANKS HOLDING CONSUMER
LOANS, BY TYPE OF LOAN AND SIZE OF CITY,
JUNE 30, 19471

Area

Total
Number Auto­
mobile
of
Paper
Banks

Repair
and
Other Moderni­ Instal­ Single
ment Payment
Retail
zation
Cash
Loans
Paper Instal­
Loans
ment
Loans

Chicago.........................

57

86

58

82

95

86

Detroit.......... .................

5

100

60

100

100

100

All cities over
60,000 population..

141

88

67

86

94

85

Cities 5,000-50,000
population................

327

86

74

66

89

94

Cities under 5,000
population................

531

70

59

26

68

88

All District Banks....

999

78

65

47

79

90

1 Excludes industrial banks.




cent since V-J Day. Except for a relatively small pawn­
broker volume, virtually all reported single payment loans
are made by banks.
Since V-J Day, both commercial banks and sales finance
companies have experienced increases in automobile instal­
ment receivables of slightly over 300 per cent, and in other
retail instalment receivables almost 350 per cent. Such high
percentage figures are partly the result of the low absolute
level to which instalment selling fell as the result of the
sharp wartime curtailment in the production of durable
consumer goods and price increases. These gains would
have been even higher, however, if work stoppages had
not delayed the resumption of postwar production of
durable consumer goods late in 1945 and early in 1946.
At present, total automobile credit is 41 per cent and other
paper 61 per cent of their respective 1941 levels. As indi­
cated in Business Conditions for August 1946, it is in the
instalment sales segment of the consumer credit field that
commercial banks have made the least relative progress and
face the greatest problems in the future. Although holding
their own thus far in the postwar period, banks have not
increased their portion of retail instalment receivables in
the hands of all financial institutions.
Abnormal conditions prevailing since V-J Day make diffi­
cult even a tentative evaluation of the ultimate position
which commercial banks may be expected to assume in in­
stalment cash lending and retail instalment sales financing.
With the reversion of consumer expenditures-savings pat­
terns toward prewar norms, the growing production of con­
sumer durable goods, and the prospective relaxation of credit
terms with the end of Regulation W on November 1, con­
sumer instalment financing will in the coming months be
carried on under more “normal” conditions. The “perma­
nent” relative positions of the several types of financing
agencies should emerge somewhat more clearly in 1948.
DISTRICT MEMBER BANK LENDING PATTERN

Consumer loans of Seventh District member banks ag­
gregated 450 million dollars on June 30, 1947, one-eighth
of total member bank loans and discounts, and an increase
of 140 per cent since V-J Day. The preponderance of this
financing is concentrated in banks located in the larger
population centers. At midyear, for example, 79 member
banks in Chicago, Detroit, Milwaukee, and Indianapolis
together accounted for 55 and 51 per cent, respectively, of
outstanding single payment and instalment credits extended
by the District’s 1,000 member banks. The corresponding
figures for banks in all District cities of 50,000 population
and over are 74 and 76, respectively (see Chart 1). These
general levels also apply to automobile and other retail in­
stalment financing. In the case of instalment cash loans the
Page 1

dominance of cities with populations of 50,000 and over is
not quite so pronounced, 63 per cent. Member banks in
District cities under 5,000 population accounted for only
about seven per cent of all outstanding consumer credits as
of June 30, 1947. Inclusion of all nonmember insured banks
raises the last percentage only slightly.
AUTOMOBILE INSTALMENT FINANCING

At the end of June, automobile paper accounted for 37
per cent of all outstanding consumer instalment credits of
District member banks. This figure varied gradually down­
ward from 48 per cent in cities under 5,000 population to
32 per cent in cities over 50,000 persons (see Chart 2). The
greater percentages in the smaller cities reflect less intense
competition from sales finance companies and somewhat
less demand for other types of consumer instalment credit.
Among the District’s major cities, the corresponding per­
centages varied from 40 in Chicago to 10 in Indianapolis.
Such variations are partly the result of differences in the
extent to which major banks in each metropolis solicit auto­
mobile instalment financing business and, somewhat para­
doxically, the nature and extent of bank relationships with
finance companies. In Chicago, for example, over two-thirds
of the bank-held automobile paper was purchased from
finance companies under arrangements whereby the latter
originate the business from dealers and service the collec­
tions. If these finance companies retained title to the paper
and deposited it as collateral for straight loans, the banks
would then report the resulting loans in the commercial
and industrial rather than in the consumer instalment
(automobile) category. The practice of purchasing auto­
mobile paper from finance companies is less extensive
among banks in Detroit, Milwaukee, and Indianapolis.
Except for the area west of the Rockies, commercial banks
have relied largely on direct solicitation of consumers in
developing retail automobile instalment financing business.
Finance companies on the contrary have concentrated on
building dealer relationships. Since V-J Day, purchased
automobile paper of all commercial banks in the nation has
increased much faster, over 360 per cent, than direct con­
sumer automobile instalment loans, 270 per cent. Judging
from Seventh District experience, however, a considerable
part of the increase in purchased paper is the result of
purchases from finance companies. Allowing for this point,
there does not seem to be any concerted swing on the part
of banks, in the Seventh District at least, from the con­
sumer to the dealer route, in developing automobile financ­
ing business.
For several reasons, outstanding automobile instalment
credit promises to increase substantially by the end of 1947,
perhaps as much as 50 per cent over the midyear level.
Although still handicapped by the shortage of certain mate­
rials, automobile production has reached a rate of approxi­
mately 3,750,000 passenger cars a year, considerably above
the average of the prewar decade. As a result of some
relative drop in “fleet” sales, rising cost of living, and de­
pleted individual savings, almost 30 per cent of the current
dollar volume of automobile sales is on credit, compared
Page 2



with less than 20 per cent a year ago. This percentage will
undoubtedly continue to climb toward the prewar level of
over 50 per cent. Since almost one-third of Seventh District
member bank automobile paper is now generated through
purchases from finance companies, the extent to which this
practice is continued will be an important factor determin­
ing the future course of District bank automobile paper
portfolios. Promotional efforts aimed at consumers and deal­
ers also will be important determinants.
OTHER RETAIL INSTALMENT FINANCING

Other retail instalment financing (including home repair
and modernization loans, and paper covering consumer
goods other than automobiles) shows two outstanding char­
acteristics: (1) it is the most important type of District
member bank consumer instalment financing, comprising
43 per cent of the total on June 30, 1947, as indicated in
Chart 2; and (2) it is more unevenly distributed among
individual banks than other types of consumer instalment
credits. Only about one-half of the banks in District cities
under 50,000 persons have such loans in their portfolios and
then only in modest amounts. These banks account for less
than 15 per cent of this type of financing in the District
as a whole. Within the largest cities, although the propor­
tion is somewhat greater, the volume is heavily concen­
trated, almost one-half of the District total being accounted
for by eight banks.
If retailers generally depended upon financing agencies
as much as automobile dealers, the volume of other retail
instalment paper in the hands of banks would be consid­
erably larger. The relatively smaller volume of such bankheld paper in the smaller cities probably results from less
widespread use locally of major consumer durables other
than automobiles and also indicates a somewhat greater
tendency toward owner-labor in home repair and moderniza­
tion. Arrangements between certain banks and large retailCHART

I

LARGE CITIES DOMINATE SEVENTH FEDERAL RESERVE
DISTRICT TOTAL MEMBER BANK LENDING TO CONSUMERS*
(IN PER CENT OF TOTAL ON JUNE 30, 1947)

SIZE

OF CITY

TOTAL

LOANS

CONSUMER
LOANS

CONSUMER
INSTALMENT LOANS

UNDER 5,000

5,000-50,000

iciTies;
ilTIES'
DETROIT;

OVER 50,000
■DETROIT ■

>■74%

AMOUNT
OUTSTANDING

$

3,707,571

(IN THOUSANDS)
*

EXCLUDES

INDUSTRIAL

BANKS.

$

450,754

$

238,712

CHART

Z

BANKS IN SMALLER DISTRICT CITIES ACTIVELY ENGAGE
IN AUTOMOBILE AND INSTALMENT CASH LENDING*
PERCENTAGE DISTRIBUTION OF CONSUMER INSTALMENT LOANS
BY TYPE IN MEMBER BANKS BY SIZE OF CITY, JUNE 30, 1947
SEVENTH
DISTRICT

CITIES

BY POPULATION

CITIES OVER 50,000 POPULATION

O.LIUU I Li
50,000

are on an equal competitive footing with commercial banks.
Single payment cash loans, although showing the least
postwar growth, still comprised 47 per cent of all consumer
loans of District member banks at midyear. Lfeavily con­
centrated in a few of the larger banks in the metropolitan
centers, about three-fourths of these loans were accounted
for by banks in cities of 50,000 persons and over. There is
some tendency for banks to convert single payment into
instalment loans to obtain greater return and more systematic
provisions for repayment.
CREDIT TERMS

The complete termination of Federal consumer credit
regulation by November 1 will give further impetus to the
volume of outstanding instalment credit, particularly auto­
mobile. Although the end of Regulation W will exert fur­
ther inflationary force in the economy, the financial com­
munity seems to be more concerned with two other aspects
of weakened credit terms: (1) undesirable use as a com­
petitive weapon, and (2) increased delinquencies.
Available evidence points to progressively weakening
ers, including public utilities, account for the uneven dis­ credit terms for a time after Regulation W expires. Recent
tribution of the volume of other retail instalment financing recommendations of the American Bankers Association and
a simultaneous announcement by one of the national finance
among the larger city banks.
companies indicate that maturities on automobile and other
I
durable commodity credits, on the average, will exceed the
CASH LENDING
present 15-month limit. Considerable relaxation also appears
Personal instalment lending constitutes one of the earliest certain on down payment requirements.
Terms on credit sales of commodities exempted previously
consumer instalment financing activities of most banks. Not
only do more District member banks engage in such lend­ from Regulation W have since shown definite easing ten­
ing than in any other type of consumer instalment financing, dencies. Average collections of charge accounts have slowed
but the volume is more evenly distributed among individual down, and delinquencies have increased since the elimina­
banks and among banks in cities of different sizes. Banks tion of control in the autumn of 1946. Similar trends have
in cities under 50,000 population accounted for over one- also been apparent in home repair and modernization in­
third of all District personal instalment loans on June 30. stalment loans and in the instalment sales of such items
Commercial banks are subject to competition from indus­ as pianos and bicycles. Instances of maturities of three years
trial banks, industrial loan companies, and small loan com­ or more and of down payments under 10 per cent are not
panies. Among the major factors affecting competitive posi­ uncommon among Midwestern piano sellers.
tions is the loan limit to any single borrower. Small loan
Pianos and bicycles illustrate the pressure on sellers to
companies at present are particularly concerned with this make terms easier when supply-demand relationships become
problem. In Illinois and Michigan they have secured amend­ more normal, a condition now being approached by nu­
ments this year to the Uniform Small Loan Law, increasing merous goods typically sold on the instalment plan. How­
the permissible loan limit to any one borrower from $300 ever, even for items still in short supply, such as automobiles,
to $500. In certain other states loan companies are exceeding dealers may be willing to substitute instalment for cash
small loan law limits by operating under general usury sales or to make instalment sales on somewhat more lenient
statutes. In Wisconsin and Indiana similar results have been terms than presently allowable as a means of supplementing
accomplished through one management operating both a their income.
small loan company and an industrial loan company, the
Terms considerably in excess of those permitted by
latter having higher loan limits.
Regulation W are, of course, quite compatible with safety
The recently formed Indiana Association of Consumer of principal. This is another way of saying that the primary
Credit Banks aims to strengthen the position of commer­ function of Regulation W lies in another direction, i.e., to
cial banks in the consumer loan field through a five-point exert a stabilizing over-all influence on the economy.
legislative program. This includes limiting operations of
Part of the small increase in delinquencies in the last year
small loan and industrial loan companies to their home has been the natural consequence of the increased credit
counties and completely separating operations of the two business resulting from the return of civilian production
types of companies. Nonbank agencies have in turn or­ toward more normal levels. Delinquencies are, however,
ganized a trade association to promote their interests. Indus­ still considerably below prewar levels and will probably
trial banks, by virtue of also being state or national banks, remain so in the months immediately ahead.
OTHER RETAIL INSTALMENT PAPER ANO REPAIR
AND MODERNIZATION INSTALMENT LOANS

I

*

*r

I

EXCLUDES

INSTALMENT CASH
INDUSTRIAL




LOANS

BANKS.

Page 3

Money Market Developments
Banks Adjust to Peacetime Factors
With the termination of the Treasury’s large-scale debt
retirement program, the resulting pressure on bank reserves
was relaxed in mid-June. Except for 200 million dollars of
Treasury bills, no marketable debt has been redeemed for
cash since the one billion dollar pay-off of June 1 certificates.
Subsequently, other money market factors have assumed
relatively greater influence over member bank reserves.
The effect of bank demand for long-term securities on the
market for Governments has been offset to some extent by
continued sales of securities from Treasury investment ac­
counts. These sales have reduced the downward pressure on
long-term yields, particularly on the ineligible issues.
BANK RESERVES AND DEPOSITS

Bank reserve positions and the demand for Federal Reserve
credit have reflected largely Treasury receipts and disburse­
ments, gold and foreign account operations, and changes in
money in circulation. Treasury expenditures were heavy
after the middle of June, including over 700 million dollars
of quarterly interest payments on the public debt and the
redemption of about 350 million of savings notes. Most of
these disbursements were made out of funds previously ac­
cumulated with the Reserve Banks. Banks used the reserves
gained from these transactions and from gold inflow and
disbursements from foreign accounts to repurchase Treasury
bills and to build up their excess reserves. Late in the month
and early in July, the market was again temporarily under
pressure as reserves were drained out of the banks by income
tax collections, the pre-holiday outflow of currency, and a
moderate increase in required reserves as war loan deposit
accounts were again made subject to reserve requirements
on July 1. In the final week of July, reserves were again
under pressure, most of which was attributable to payments
for the 250 million of securities issued by the World Bank.
Two significant factors which have supported member
bank reserves are gold and foreign account operations and the
reduction in currency outflow. As a result of heavy foreign
purchases of goods in excess of our imports, there has been
a persistent inflow of gold and disbursements from foreign
accounts since the end of 1945. United States monetary gold
stock rose almost 700 million dollars in the 11 weeks ended
August 13, and is 1.3 billion over the level of a year ago
despite our payment in gold of almost 700 million dollars
to the International Monetary Fund.
Meanwhile, member bank investments in Government
securities have increased in recent weeks following a sus­
tained decline accompanying rapid retirement of bank-held
debt by the Treasury. Reporting banks in leading cities
showed a net increase of more than 600 million dollars in
total Governments in the seven weeks ended July 23, in­
cluding an increase in United States bonds of almost 300
Page 4



million. Bill holdings were up 480 million, while certificates
dropped about 100 million. In the following week substantial
sales of bills and continued sales of certificates offset a large
part of the previous increase in total reporting bank holdings.
Treasury bond portfolios, however, expanded by an addi­
tional 120 million dollars. Holdings of Governments by the
Reserve Banks during the entire period rose moderately, the
600 million dollar decline in bill holdings being more than
offset by the acquisition of a larger amount of certificates.
Total loans also showed a moderate increase during this
period despite the seasonal decline in the early part of June.
Real estate and other loans, except those on securities, have
continued the upward trend which began early in 1946.
Deposits of businesses and individuals continued to grow
with the expansion of loans and investments. Demand de­
posits adjusted of the weekly reporting member banks rose
more than 800 million dollars in June and July but were
reduced in the first two weeks of August.
GOVERNMENT SECURITY MARKET

The market for long-term Government securities has re­
mained fairly steady despite the recent actions connected
with the Treasury’s debt management policy. After the
relaxation early in July of the Federal Reserve rate peg on
Treasury bills, the demand for bonds continued to be strong,
and price advances have been relatively greater on the long­
term unrestricted issues.
Termination of the buying rate on bills and the repur­
chase privilege was explained as a move to restore the bill
as a market instrument and to give added flexibility to the
Treasury’s debt management program. It frees the bill rate
to reach a level in the market which is appropriate in rela­
tion to yields on certificates of indebtedness. The move does
not, however, imply a free market. The directive stated that
the System will continue to buy and sell bills as well as
other Governments in order to maintain an orderly Govern­
ment security market. The new Treasury bill procedure was
first applied to the bills offered July 10. In the following
weeks the yield has stabilized at about 0.74 per cent, ap­
proaching the yield on certificates of a similar maturity.
Other steps which have influenced the Government secur­
ity market are related to the Treasury’s certificate refunding
program. The 1.2 billion August 1 certificates were replaced
by a similar % per cent issue hut with an eleven-month
maturity, and it was recently announced that ten-month %
per cent certificates will be offered in exchange for the 2.3
billion of September 1 maturities, making a total of 6.5
billion dollars in certificates which will mature July 1, 1948.
It was also indicated that the 1.7 billion 114 per cent notes
and the 2.7 billion IV2 per cent notes maturing September 15
will be refunded into 1 per cent 121/2-month notes.

Iowa State Finance—II
Postwar Revenues Keep Pace with Expenditures
The widely anticipated postwar worsening in state finances
has yet to materialize in Iowa. As is well known, during the
war state governments generally fortified their cash position.
Tax receipts were augmented by rising prices and the high
level of the nation’s business. State expenditures were de­
liberately and involuntarily reduced or postponed in order
that more of the country’s energies could be bent to the
prosecution of the war. The resulting annual surpluses
accumulated in cash and investment balances. It was then
generally assumed that in the early postwar years the situa­
tion would be reversed. A recession in business activity was
inevitable; it would have a depressing effect on tax yields.
Substantial demands on the states’ cash resources for ex­
panding welfare services, salary adjustments for employees,
and capital outlays for equipment and facilities were ex­
pected to result in a rapid depletion of war accumulated
surpluses.
These predictions as to postwar state finances have yet
to be borne out, though in some jurisdictions a substantial
reversal of the trend in the relationship of revenues to
expenditures may be noted. Payroll commitments, for ex­
ample, are up sharply, the increase being found in both the

number of state employees and their average compensation.
The U. S. Bureau of the Census reports that in April 1947
there were 3.7 million state and local government employees,
an increase of 18 per cent from April 1945 employment.
The advance in monthly payrolls was almost twice as pro­
nounced—up 38 per cent. State employment and payrolls
constitute between 20 and 25 per cent of the total for both
state and local governments.
On the other hand the actual disbursements of state
monies for the projected postwar construction of highways
and public buildings at educational, health, and welfare
institutions are still being largely deferred because of sharply
advanced costs and a desire to avoid competition for re­
sources needed in housing construction. Proposals for vet­
erans’ bonuses and assistance are receiving favorable con­
sideration in many states and will entail large expenditures,
but these usually involve long-term financing. The reces­
sion in business conditions and price levels has not oc­
curred, and state tax yields have continued to set new rec­
ords. Rising prices and changes in the pattern of consumer
expenditure since the war have been a tremendous stimulus
to net income and sales tax yields. The net effect of these

RECEIPTS, DISBURSEMENTS, AND BALANCES
STATE OF IOWA OPERATING FUNDS
FISCAL YEARS ENDING JUNE 30, 1920-47
MILLIONS

OF

MILLIONS

DOLLARS

140 I-----------------------RECEIPTS IN EXCESS OF DISBURSEMENTS
(SURPLUS)

OF

---------- .
TOTAL

RECEIPTS

TOTAL

DISBURSEMENTS

DOLLARS

.

140

DISBURSEMENTS FROM RECEIPTS
DISBURSEMENTS IN EXCESS OF RECEIPTS
(DEFICIT)




BALANCES
YEAR

-

/DIRECT

20

indebtedness:

Page 5

factors upon the financial condition of the states generally
has been much less marked than anticipated. New state
taxes, higher rates for existing levies, or a generous use of
state credit now awaits a full scale resumption of capital
outlays, larger aids to local governments, a reversal in price
trends and the level of economic activity, or some combina­
tion of these factors.
An over-all picture of Iowa state finances indicates that
on June 30, 1947, the State was in exceptionally healthy
financial condition, even for a period of prosperity. The
character of the State’s revenue structure discussed in the
August issue of Business Conditions provides a tax system
which responds promptly to changes in prices and business
activity. Revenue receipts accrue at more frequent periods
throughout the year, and the new taxes introduced in the
1930’s are less susceptible to the hazard of delinquency than
the property tax on which the State rested major depend­
ence two decades ago. All direct state debt has been retired,
and existing indirect obligations will be reduced to nominal
proportions by 1950. The level of state expenditure since
the war has increased rather sharply but hardly out of pro­
portion to other economic series. The cash and investment
balance in the state treasury is equivalent to a full year’s
expenditure.
INCOME, OUTGO, AND BALANCES 1920-47

For nearly three decades annual state expenditures from
the operating funds have only infrequently been in excess
of receipts.1 Except for the years 1928-34 when the balance
on hand progressively declined, deficits have been casual
and small. During the 1920’s the annual balance on hand
fluctuated at an amount equivalent to four to six months’
average expenditure. At the end of the fiscal year 1934 the
balance on hand was only sufficient, assuming the prevail­
ing segregation of funds could have been eliminated, to
have operated the State for two and a half months. Since
a portion of this balance was tied up in closed banks, the
condition of the State’s treasury was indeed precarious. From
this low level the cash on hand has steadily increased both
in absolute amount and relative to the total of expenditures.
The balance on June 30, 1947, of 123 million dollars is an
all-time high. The greater part of this total has accumulated
from net additions from 7 to 20 million dollars during each
of the war and postwar years.
Highlights in the State’s financial history since 1920 in­
clude the floating of the 22 million dollar bond issue for
the payment of a soldier’s bonus to the veterans of World
War I. These bonds were sold in the fiscal years 1922 and
1923 and paid off in annual principal instalments of 1.1
million dollars through 1943.
The drastic measures adopted by the state government to
insure public deposits in closed banks are not directly re­
flected in the accompanying table and chart. At the height
Operating: funds are those used in the day-to-day management of the
State's business. In addition to the general and road funds the classification
includes a variety of accounts earmarked for the receipt of specified revenue
and restricted as to disbursement. The Unemployment Compensation Trust
Fund, the operations of the liquor monopoly, and the State Sinking Fund
for Public Deposits, and funds for which the State acts as a trustee are ex­
cluded. See footnote to accompanying table for detailed list of funds included.

Page 6



of the depression, public funds belonging to the state and
local governments frozen in closed banks were estimated to
aggregate 17 million dollars. The State had earlier (1926)
undertaken to insure such deposits, but the resources of the
State Sinking Fund for Public Deposits were temporarily
inadequate to meet the demands on it. The magnitude of
this financial commitment is indicated by the total claims
paid during the twenty-year life of the Fund; they have
totaled 35.7 million dollars. The burden of deposit insurance
was an additional aggravation of the financial difficulty
which beset the State during the early 1930’s.
The role of Federal aid in combatting the effects of severe
depression and unemployment is reflected in the accom­
panying table. In the late 1920’s Federal aid-principally
for highways—was about seven per cent of total state rev­
enues. In the fiscal years 1931-33 it increased to 12 per
cent, and was 21 per cent in 1934 and 32 per cent in 1935.
In this latter year Federal aid was equivalent to half of
the state tax revenues. From this point forward Iowa’s strug­
gle with depressed economic conditions depended less on
direct Federal assistance and more on the reorganized tax
system. Currently Federal aid is slightly less than 15 per
cent of total state revenues.
In its financial relations with local units of government
in the period since 1920 the State has made substantial
percentage increases in direct aid and the sharing of taxes.
Up to 1947 nearly the entire amount of these payments
(averaging 15 million dollars annually during the past
decade) had been earmarked for streets and roads. Ap­
proximately eight million dollars was required to service
primary road bonds issued by the counties to construct state
highways. The counties also received four-ninths of the
three cent motor fuel levy and one-half of the motor carrier
taxes. Since 1946 both the municipalities and counties have
participated in sharing to the extent of the net proceeds of
an additional tax of one cent on motor fuel. In the aggre­
gate, these aids and shared taxes when related to state
revenues are a much smaller contribution to local finances
than is made in the majority of states.
Beginning in 1936 the homestead credit has been a substantial part of total state expenditure, roughly comparable
to the amounts of local aids and shared taxes in these years.
Other increases in Iowa government costs since 1920 are
due to outlays for highway construction and maintenance
and to the assumption of responsibility by the State for
furnishing relief to the unemployed and economic security
to the aged and other dependent groups. Highway ex­
penditures expanded rapidly during the 1920’s and at­
tained a relatively stable annual level of between 15 and
20 million dollars during the 1930’s. The amounts spent
during the war and postwar years, however, are substantially
below prewar levels.
Relief expenditures in Iowa began in 1933 and were
made by the Iowa Emergency Relief Commission from
Federal, state, and local funds. The peak in these ex­
penditures was reached in 1935. The Social Security pro­
gram began in 1935 and has involved a steadily increasing
outlay each year thereafter. The present annual cost is in
excess of 20 million dollars.

*

*

*

*

*

There is nothing in the record of this period, which in­
cludes years of prosperity and severe depression, which
suggests precedents for departing from a policy of the ap­
proximate annual balancing of the State’s income and outgo.
The preponderance of evidence is to the contrary—even in
the most difficult years large deficits were avoided. The
comparatively large cash and investment balance now on

hand suggests that state expenditures during the next two
years may exceed revenues without in any manner weaken­
ing the State’s financial condition. Whether or not this
occurs depends very largely on economic conditions and
their inevitable effect upon tax yields. Just as the principal
taxes in the present Iowa revenue system have exhibited
sensitivity to advancing prices and a high level of employ-

RECEIPTS, DISBURSEMENTS, AND BALANCES
STATE OF IOWA OPERATING FUNDS1
FISCAL YEARS 1920-47
(In millions of dollars)
Receipts
Ending
June 30

Federal
Aid4

Disbursements

From
Counties5

Total2

Taxes8

1920
1921
1922
1923
1924

21.1
23.0
27.5
44.4
41.4

17.0
18.0
19.9
23.4
24.9

.5
1.6
3.9
2.8
2.7

1.5
1.9
2.2
3.7
3.0

1925
1926
1927
1928
1929

33.5
36.7
38.5
41.9
41.6

27.0
30.8
30.6
33.2
34.0

2.0
1.4
3.0
3.9
2.9

2.6
2.1
2.7
2.2
2.7

—
—

1930
1931
1932
1933
1934

47.8
58.2
45.6
43.1
50.5

38.8
39.2
36.9
31.1
33.2

2.7
5.4
4.1
7.5
10.7

1935
1936
1937
1938
1939

73.0
68.3
80.2
83.2
82.6

45.6
53.8
63.0
63.8
62.9

1940
1941
1942
1943
1944

85.8
94.8
97.1
89.9
90.3

194513
194611
194711

92.5
108.4
142.7

Loans®

.1

Earnings7

Total2

General8

2.0
1.4
1.4
1.7
1.6

15.6
22.7
30.3
39.7
41.0

13.5
22.0
29.6
39.1
40.4

—
—

1.9
2.4
2.2
2.6
2.0

32.4
33.5
37.4
42.9
43.2

31.4
29.9
32.9
36.3
36.4

4.1
11.4
2.7
2.7
2.3

—
—
—
—
—

2.2
2.2
1.9
1.8
4.3

49.1
57.6
48.0
40.8
55.1

40.3
47.5
38.7
31.7
41.7

23.6
10.0
13.3
13.3
12.7

1.9
2.0
1.9
2.4
2.8

__
—
—
—

—

1.9
2.5
2.0
3.7
4.2

65.1
63.5
73.8
82.5
83.4

61.9
45.4
47.6
50.0
57.1

65.1
70.0
75.5
67.2
66.8

12.0
15.4
13.1
14.0
12.9

5.1
5.9
4.9
5.6
5.7

__
—
—
—
—

3.6
3.5
3.6
3.1
4.9

82.3
89.7
90.1
81.5
75.4

70.0
86.1
112.1

12.9
11.6
20.0

5.8
6.4
6.7

__

3.8
4.3
3.9

79.1
86.4
123.8

,i

.1
12.8
9.2
__

—
—

Consists of the General Revenue Fund, all special tax funds except beer
tax revenues prior to 1941, all Federal grants except those made directly
to state educational institutions, and all special receipts designated by the
legislature for specific purposes. Specifically, the following are included:
General Revenue, Capitol Grounds Extension (1920-30), Soldiers’ Bonus
Bond (1923-47), Soldiers’ Bonus Tax (1923-47), and Additional Bonus and
Disability Funds (1933-47) held by the state and county treasurers; Gaso­
line License Fees (1925-47), Gasoline Administration, and Gasoline Refund
Funds (1925-47) ; Primary Road Fund held by state and county treasurers
(1924-47) and the Primary Road Contingent Fund (in 1924 and thereafter
increases and decreases in this fund are offset against disbursements of
the Primary Road Fund) ; earnings of the Liquor Control Commission
(1924-47) and of miscellaneous boards and commissions; Three Point Tax
Fund (including sales and individual and corporation income taxes [1934­
47]), Use Tax Fund (1937-47) and Chain Store Tax and Protest Account
(1936-40) ; Old Age Pension (1934-47), Aid to Blind Pension (1939-47),
and Aid to Dependent Children Funds (1944-47) ; and all Federal grants
for education (except those made directly to state universities and col­
leges), highways, relief (1933-36), and social security. Excludes payroll
taxes and withdrawals for benefit payments from the Unemployment
Compensation Trust Fund, costs incurred in the operation of state liquor
stores, beer revenues and interest payments diverted to the State Sinking
Fund, and payments to common school and university trust funds and the
Old Age and Survivors’ Insurance Trust Fund. Also excludes revenues
from student fees and business enterprises at the state colleges and uni­
versities.
2Less transfers, refunds, and disbursements for investment,
includes the following: total amount of locally collected property tax for
general state purposes, for capitol grounds extension (1920-25), for sol­
diers’ bonus bond redemption (1924-44), and the equipment tax on trans­
portation companies; personal and corporation income taxes (1935-47),
inheritance, insurance, poll (1934-47), and miscellaneous business taxes;
and general sales (1934-47), use (1937-47), cigarette (1922-47), beer
(1941-47), liquor store earnings (1934-47), and miscellaneous sales taxes.




Homestead
Credit

Local
Aid®

Shared
Taxes10

Balance11

1.6
.2

—

.5
.5
.7
.6
.6

—

11.0
11.3
8.5
13.2
13.6

—
—
—
—

.6
.5
.9
3.0
3.1

.4
3.1
3.6
3.6
3.7

14.7
17.9
19.0
18.0
16.4

4.4
5.4
5.0
5.3
8.9

4.4
4.7
4.3
3.8
4.5

15.1
15.7
13.3
15.6
11.0

4.0
11.6
17.5
11.9

-

8.0
8.6
8.6
8.8
7.6

5.2
5.5
6.0
6.2
6.8

18.9
23.7
30.1
30.8
30.0

54.1
60.9
60.7
53.2
47.3

12.5
13.0
13.6
14.0
14.3

9.0
9.1
8.9
9.0
8.8

6.7
6.7
6.9
5.3
5.0

33.5
38.6
45.6
54.0
68.9

50.9
53.9
*

14.5
15.2
*

8.7
8.7
*

5.0
6.4
*

82.3
104.3
123.2

—
—
—
—

__
—
—
—

—

—
—

4Consists of grants for vocational education, except those madq directly to
the State College, vocational rehabilitation, highways (regular, emergency,
and farm to market road funds), child welfare, unemployment compensa­
tion administration, social security, and public health.
GThese are payments made for care of county patients in state institutions,
for services of the State Highway Commission, and for one-fourth of the
cost of aid to the blind and aid to dependent children programs.
aIncludes proceeds from the sale of anticipatory warrants to finance the
capitol ground extension program (1920-22) and from the sale of soldiers’
bonus bonds (1923-24).
7Consists of fees and earnings of state welfare and penal institutions, in­
terest on state funds, except during 1926 to 1941 when it was diverted to
the State Sinking Fund, hunting and fishing license fees, and miscel­
laneous receipts by state departments, boards, and commissions. In 1944,
includes two million dollars transferred from the State Sinking Fund,
includes expenditures for state colleges and universities, highways, state
welfare and penal institutions, unemployment relief (1933-46), the social
security programs (1935-46), and general state administration.
°Made for interest payments and retirement of primary road bonds, edu­
cation, and aid to county fairs.
.
10In 1920 and 1921, consists of the counties’ share of the state collected
motor vehicle taxes; in 1925 and thereafter, of the gasoline tax; and in
1926 and thereafter, of the taxes on motor carriers.
“Includes cash on hand in state and county treasuries for all funds de­
scribed above. Also includes investment balances of the General Fund and
the Additional Bonus and Disability Fund and the working balance of the
Liquor Control Commission.
12Subject to revision.
♦Not available.
SOURCES: Iowa State Budget (biennial), Report of Treasurer of State
(biennial), Cash Financial Statement, State of Iowa, (quarterly reports
for fiscal years 1945-47), and office of the State Comptroller.

Page 7

some of which was belatedly settled, and some of which is
still pending, has distorted the timing of the actual dis­
bursement of the funds from that originally contemplated.
Taking these factors into account, relief to property owners,
which includes the three property tax credit programs
(homestead, agricultural land, and military service), will
probably be about six million dollars higher in 1948 and
1949 than in 1947. The direct aids to local governments
(the public schools, the cities and towns, and the highway
aids to counties and municipalities) will increase about an
PLANS FOR 1947-49
equal amount.
The obligations of a state government for service are
The expenditures for highways and public buildings in
reappraised biennially by the general assembly. Since no the next biennium are most difficult to estimate because of
general assembly may restrict the discretion of its suc­ conditions in the construction industry and the fact that
cessors except by following a prescribed constitutional pro­ most of the authorized expenditure can and may be post­
cedure, it is ordinarily impractical to focus detailed attention poned. So far as available funds and legislative sanction
upon the future of state finances beyond the biennial period. are concerned, construction projects could amount to as
The 52nd Iowa General Assembly has recently completed much as 30 million dollars in each of the years 1948 and
its task of formulating a revenue and expenditure plan for 1949. The actual expenditure, however, will more likely
the State for the period ending June 30, 1949. What effect be less than one-half of this amount.
will this plan have on the State’s financial condition?
Considering the State’s over-all budget these estimates
As was indicated in the previous article on Iowa state suggest an increase over the 1947 level of expenditure in
finance, the 52nd General Assembly has fortified the State’s the neighborhood of 35 to 40 million dollars. State tax
revenue system in anticipation of the possibility of some revenues at the rate of yield in the fiscal year 1947, plus
decline in tax yields during the next two years. The abate­ the income from higher taxes adopted by the last legislature,
ment of 50 per cent of the personal income tax, which was and increases in Federal aid for highways and social security,
in force for the years 1942-46, was discontinued for the will amount to about 160 million dollars. It is doubtful,
income year of 1947. The beer tax was doubled, and the therefore, that the State will fully cover the estimated increase
markup on the liquor monopoly sales sufficiently increased in expenditure, but the drain on the present cash and
to permit the transfer to other state funds of an amount investment balance will likely be small, unless there is a
equivalent to 10 per cent of gross receipts. These measures marked depression in economic and agricultural conditions
were calculated to provide a modest amount of insurance adversely affecting tax revenue.
(10 to 15 million dollars annually) for financing an ex­
There is no rule of thumb for determining the amount of
panded expenditure program without an excessive reduction a reasonable cash balance for operating a state government
in the cash and investment balance in the state treasury. which cannot resort to short-term deficit financing. Since
The annual expenditure of the State during the next two the Iowa constitution prohibits borrowing for casual deficits
years can be only partially determined from the regular in excess of $250,000, any flexibility in the relationship of
biennial appropriations. Even assuming that all amounts revenues to expenditures must be reflected in the balance
appropriated are spent, certain items of expenditure are on hand. The experience of past years is pertinent, but
covered by appropriations that are indefinite in amount or historical relationships are subject to misinterpretation be­
contingent on the yield of a specified tax; and other items, cause of changes in the fund structure of the State. During
such as Federal aid and the earnings of earmarked funds, periods of moderate stringency, some states are known to
are not included in the regular budget. An over-all view have experienced severe financial distress because their fund
of state finance, therefore, requires supplementary estimates structure segregated total cash into a large number of ear­
of these amounts in addition to the budgeted items.
marked pockets which could only be employed for specified
The appropriation items that can be determined with purposes. This practice sterilizes, temporarily at least, large
relative certainty include operating expenses of general de­ amounts of cash and requires a considerably larger cash
partments, which are expected to be approximately 2.3 balance for conservative operation than would otherwise be
million dollars higher than in 1947, institutional expenses necessary. In eliminating several segregated funds, the 52nd
under the Board of Control, 1.7 million dollars more; Board General Assembly has done away with at least some of the
of Education appropriations, 4.7 million dollars more; and requirements that prevailed in former years.
The size of the balance that ought to be kept on hand is
the State share of Social Security costs, up 2.2 million
also dependent on the stage of the business cycle. In
dollars.
The estimates of expenditures for relief to property tax­ periods of prosperity the balance will be larger than in
payers and aids to local government are dependent in part periods of severe depression. Balances in other Midwestern
on liquor monopoly profits and motor tax fuel yields. Prior states are roughly comparable to those of Iowa and evidence
experience is of limited value in estimating these items the same characteristics, dropping below a two-month ex­
because the aid programs were substantially revised by both penditure level in depression and rising to as high as a full
the 51st and 52nd General Assemblies. Ensuing litigation, year’s expenditure in prosperity.
ment, they will he vulnerable to the effects of falling prices
and a period of declining business activity. The sales and
use taxes have been abnormally productive in the past year
and may continue so for a limited time because of large
purchases of such capital goods as automobiles and farm
equipment. The Iowa economy is dependent in large meas­
ure on agricultural conditions; as long as agriculture pros­
pers, state revenues are in slight jeopardy.

Page 8



LIVESTOCK AND MEAT SITUATION
(Continued from Inside Front Cover)

of 1947 was the smallest since 1941, and further decreases
during the year probably are occurring. This will reduce, to
some extent, the adverse effects of a curtailed corn crop on
the number of cattle put on feed this fall. However, if the
current corn crop should fail to mature before killing frosts
this fall, a distinct possibility in view of the adverse spring
weather and delayed planting, large amounts of soft corn
would have to be disposed of by feeding it to livestock dur­
ing the fail and winter months. Such a development would
cause many farmers to seek mature feeder steers as an outlet
for such feed even though the total production of corn is
substantially less than for recent years. In general, it appears
that a strong demand for feeder cattle will he a price sup­
porting influence during the heavy marketings this fall.
DEMAND CONTINUES STRONG

Consumer incomes were at record levels in June, and the
domestic demand for meat has continued exceptionally
strong. Historically there is a close relationship between the
level of income payments to individuals and the demand for
meat. In recent months, consumers have spent more of their
incomes for meat than would be expected from past relation­
ships of income to meat expenditures. Foreign demand also
was strong, and exports were about double the 1937-41
average. During the first half of 1947, exports of meat ap­
parently totaled only 300 to 400 million pounds compared
with 900 million in the first half of 1946. In the second half
of the year, exports may be as large as or larger than the 240
million pounds shipped in the second half of 1946.
Meat animal prices in mid-July approximated the peak
reached in March and were 47 per cent above mid-June a
year earlier when price ceilings were in effect. Cash receipts
to United States farmers from sales of meat and meat ani­
mals in the first half of 1947 were about 60 per cent higher
than a year earlier and for the year are likely to exceed by a
substantial margin the record receipts of seven billion dol­
lars in 1946.
In the Seventh Federal Reserve District states cash re­
ceipts to farmers from sales of livestock and livestock prod­
ucts (dairy and poultry products included) during the first
four months of 1947 totaled 1,718 million dollars, 45 per
cent more than for the corresponding period a year earlier.
Although exports of meat in 1947 have been a small part
of total production, exports of other goods have limited the
supply of such items in the domestic market, while main­
taining high levels of income payments to the producers of
raw materials and to the labor employed in producing the
exported items. This situation has had an inflationary or
price supporting influence upon the whole economy. Farm
products, due to their rigidity of supply, are particularly
sensitive to changes in the level of economic activity.
Any letdown in employment and income payments would
result in reduced demand and price declines for most farm
products.
The anticipated high volume of production of meat dur­
ing the fourth quarter of 1947, if realized, may result in a



decline in livestock and meat prices of around 15 per cent
from third quarter levels. Any decline in demand due to
reduced employment or income payments would accentuate
the price decline. Also, with increasing supplies of non-food
items consumers may shift in the direction of prewar pat­
terns of expenditures which would reduce the domestic
demand for meat.
1948 PRODUCTION MAY DECLINE

Production of meat in 1948 is likely to fall below the
high level prevailing in 1947 due to reduced supplies of
feeds and fewer animals on farms. The July crop reports
indicate that production and carry-over of the major feed
grains for 1947-48 will total about 10 per cent less than a
year earlier. The supply per grain-consuming animal also is
below the previous year, but above the average for the past
10 years. Large supplies of hay and other roughage feeds
available for the next feeding year will encourage cattle
feeding even though grain supplies are limited. However,
cattle slaughter will decline from the high level realized
during 1947, but the timing of the decline is dependent
upon the level at which the current liquidation of cattle
inventories ceases.
Breeding for the 1948 spring pig crop will be determined
largely by the size of the 1947 corn crop and the relation­
ship between corn and hog prices late in 1947. If the foreign
demand for grain continues large, it is entirely possible that
the 1948 spring pig crop may be smaller than the 53 million
head produced this year. Such a development would reduce
pork production in the fourth quarter of 1948 and, if accom­
panied by prospects for a large 1948 corn crop, would result
in a favorable hog-corn price ratio at that time. This might
well be the turning point in the hog cycle, resulting in
increased breedings for the 1949 spring pig crop.
PRICE SUPPORTS FAR BELOW CURRENT PRICES

The average prices received by farmers for meat animals,
parity prices, and actual prices as a per cent of parity on
July 15, 1947, according to the U. S. Bureau of Agricultural
Economics were as follows:
A . ,.
Commodity

Farm
Price

Parity
Price

As a Per Cent
of Parity

Hogs ..................... $2T60
$16.80
140
Beef cattle............. 19.80
12.50
158
Veal calves ........... 20.80
15.60
133
Lambs .................... 21.10
13.60
155
Current livestock prices are much higher relative to parity
prices than are other farm products and, therefore, could
decline much more before requiring support under present
agricultural legislation. Grain prices may decline promptly
to support levels with any significant reduction in export
demand. However, meat animal prices are supported at
present levels largely by the strong domestic demand and
can be expected to break sharply only with a decline in
domestic activity. A decline in domestic economic activity,
of course, is likely to occur simultaneously with a decline in
the currently high volume of total exports.




SEVENTH FEDERAL

IOWA

RESERVE DISTRICT